Analytics platform firm continues campaign for ESG data transparency with high-frequency tracking API
The ESG movement has arguably seen a renaissance over the past couple of years. Following a global boom in assets placed in sustainable investments in 2019, largely through the actions of institutions and high-net-worth investors, the case for ESG-oriented strategies has grown even stronger as ESG-following funds showed robust in-category performance in the face of the first quarter’s COVID-19-driven downturn.
But in spite of that massive demand, financial advisors appear to be still largely lukewarm to ESG. That reality was made clear in a recent analysis conducted by Toronto-based firm Act Analytics, which found that among advisors across North America, only 5% to 10% are incorporating ESG as they manage their clients’ investable assets.
Those numbers, the co-founders of the ESG data analytics firm explained, were derived from third-party information on advisors and the firms they worked at, and a database of all advisors who’ve used language describing ESG in their practice.
Bringing transparency to ESG investing
“Advisors typically have lacked the firepower, whether it be through the technology they use or the data they have, to make educated decisions as it pertains to ESG,” said Mike Unwin, co-founder and CEO of Act Analytics. “A lot of ESG products are delivered by asset managers, and advisors have typically been at the mercy of data or ratings firms that provide boiled-down company ESG rankings and scores. It hasn’t been a very transparent way to make decisions.”
A former advisor himself, Unwin told Wealth Professional that many advisors are held back by the notion that a focus on ESG comes at the expense of profit, which is the implied thinking behind an ongoing U.S. Department of Labor (DOL) consultation that ostensibly seeks to limit the use of ESG strategies in employee retirement plans. But he maintained that by properly incorporating ESG data into their decisions, investors can actually mitigate the level of risk in momentum strategies and reduce volatility in portfolios.
“We’re helping to dispel those myths that profit and purpose are mutually exclusive,” Unwin said.
As much as advisors might like to enhance their portfolio management with high-granularity ESG data on companies, they face added barriers. As per Zachary Dan, co-founder and partner at Act Analytics: “Raw data doesn’t come cheap … it’s not really in a price range that works for most advisors. And the majority of advisors aren’t data scientists; they can’t translate the numbers for insights the way a team of engineers at a larger investment intelligence firm are able to.”
With a platform that promises to provide comprehensive and meaningful ESG X-rays of companies, Act Analytics is working to lower the barriers that prevent advisors from making the types of fully informed investment decisions that their clients would want from them. As part of that effort, the firm has come up with a functionality that provides a sense of companies’ ESG performance based on information from news outlets.
Collecting a better signal
“It’s very natural for people to see the news as a contrarian source of information that’s less biased than maybe what a company would put out there,” Dan said. “The problem is that it’s completely unstructured. So using natural language processing techniques, I wanted to extract information about ESG events in the news and use it to form a signal and a feed on certain companies for advisors to watch and be able to show to their clients.”
While Act Analytics isn’t the first outfit to do this, Dan considers theirs to be a trailblazing effort in making the information transparent and accessible. He explained that their news API is powered by three processes: entity recognition, which identifies and locks on to companies of interest; topic classification, which determines what a given article is about and how the company relates to the topic of the article; and sentiment analysis, which evaluates whether the entity is being framed positively or negatively.
“Aggregate that over many hundreds of articles and that’s how you get your signal,” he said. “We’ve been running it for a couple of months now. Currently, we support about fifteen news sources and cover 1,500 companies, with news information being collected in real time.”
A stronger focus on materiality
With the news-driven ESG data stream, Dan said advisors can augment the information that the Act Analytics platform already provides to create a more fully informed signal, which can in turn be used to make a company evaluation. He said he developed the news API as a high-frequency signal that can be readily used with quant strategies.
“One of the main criticisms of ESG data is that it’s dated by the time it gets to the investor or the advisor,” Unwin added. “With this news-driven ESG signal, we aim to provide a more real-time data point, and I think that’s something that’s sought after in the marketplace.”
Another advantage to mining news sources for information on ESG-related events, Dan argued, is that it provides for greater materiality. Because media outlets are under greater competitive pressure to publish stories that people care about, the information that they report should hold more weight in determining whether a given company is behaving in accordance with accepted ethical standards and values.
The way things are going, it seems investors and advisors won’t be starved for options on how to judge companies’ ESG performance. More and more data firms and investment intelligence providers are offering tools and information resources that rate and rank companies on a variety of metrics, which they suggest can be used both by responsible investors and by companies who want to do better. To many ESG advocates, this would count as an absolute win, but Dan has a more tempered view.
“I think that ESG investors have to be very careful to not just be box-tickers,” he said. “Any additional attention on sustainability and ESG is a good thing. But I think we in the industry have to continue to do it with sincerity and do it for the long term, as opposed to just making a quick buck.”